India is witnessing a remarkable expansion in its income tax base, but this growth is not translating into proportional increases in tax return filings, according to fresh data from the Central Board of Direct Taxes. The widening gap highlights both the success of digital compliance mechanisms and challenges in achieving voluntary tax compliance.
The Growing Disparity in Tax Compliance
The assessment year 2024-25, covering income earned during FY23-24, reveals a significant trend. The total taxpayer base expanded by an impressive 17% year-on-year to reach 116.1 million. However, the number of returns filed showed only modest growth at 5.9%, reaching just 8.08 million. This pattern has remained consistent over the past four years, with the gap between potential taxpayers and actual filers continuing to widen.
The total taxpayer base includes both individuals who file returns and those who have tax deducted at source on their income but may not file returns. This distinction is crucial to understanding the compliance landscape in India's evolving tax ecosystem.
Experts Analyze the Compliance Gap
Tax professionals point to several factors driving this increasing disparity. Riaz Thingna, partner at Grant Thornton Bharat LLP, attributes the trend to the government's successful implementation of digitization and advanced compliance tools. "Tax being deducted at source may make some taxpayers feel that their taxes are paid and compliance obligation is over," explained Thingna.
Amit Maheshwari, tax partner at AKM Global, highlighted how expanding TDS coverage has reshaped the taxpayer landscape. "An increasing number of individuals are now being categorized as taxpayers because tax is deducted at source on incomes such as interest, professional and contractual receipts, and certain high-value transactions," Maheshwari stated.
The expansion of reporting requirements through the Annual Information Statement (AIS) and Form 26AS, combined with enhanced compliance systems, has strengthened TDS-driven inclusion in the tax net. However, this hasn't necessarily translated into higher return filing rates.
Regional Success Story: Telangana's Tax Boom
While the national picture shows mixed compliance trends, some states are demonstrating exceptional growth in tax contributions. Telangana has emerged as the fastest-growing state in terms of direct tax contributions, followed by Haryana and Uttar Pradesh among large state economies.
Between FY19 and FY25, Telangana's direct tax collection skyrocketed eight-fold to reach ₹97,860 crore. The state achieved an average direct tax collection growth of 49% during this period, a remarkable performance by any measure.
Maheshwari of AKM Global explained this success: "Telangana's sharp rise in direct tax contributions is closely linked to Hyderabad's emergence as a major IT and services hub. The city's rapid expansion has boosted corporate profitability, increased the number of high-income professionals, and significantly enhanced TDS inflows."
The state's business-friendly policies and targeted incentives for the IT/ITeS sector have attracted fresh investments, contributing to a wider and more robust tax base that benefits both state and national exchequers.
The Expanding TDS Network
The government has systematically broadened TDS coverage across economic transactions, with some rates recently reduced to improve ease of doing business. Key TDS expansions include a 2% levy on cash withdrawals exceeding ₹1 crore annually from bank accounts, introduced from September 1, 2019, to discourage business payments in cash.
Additionally, a 5% TDS on payments exceeding ₹50 lakh to contractors or professionals by individuals and Hindu Undivided Families was implemented from the same date, though this has been reduced to 2% from October 1, 2024, as part of TDS rationalization efforts.
Other significant TDS provisions include a 0.1% deduction on purchase transactions above ₹50 lakh annually for buyers with more than ₹10 crore in annual sales, effective from July 1, 2021. E-commerce platforms also face a 1% TDS on certain payments to platform participants, reduced to 0.1% from October last year.
Finance Minister Nirmala Sitharaman emphasized in her February Union budget speech that the government was lowering TDS rates and raising thresholds to benefit small taxpayers receiving minor payments and ease compliance difficulties.
The Path Forward for Tax Compliance
CBDT chairman Ravi Agrawal expressed confidence in meeting the ₹25.2 trillion direct tax collection target this year. The tax authority is actively connecting with taxpayers through emails where compliance gaps are identified, leveraging the extensive data collected through the TDS network.
Ved Jain, former president of the Institute of Chartered Accountants of India, suggested practical solutions: "CBDT should analyze the data and find a way to refund TDS amounts received from individuals with income below the taxable threshold who haven't filed tax returns. For those with taxable income who haven't filed returns, appropriate steps under the law should be taken."
The expanding TDS coverage provides the Income Tax Department with unprecedented oversight of economic activity. This enables pre-filled tax returns based on known transactions, informs taxpayers about TDS-deducted transactions to prevent income omission during filing, and facilitates targeted campaigns to encourage voluntary compliance.
As India's tax infrastructure continues to evolve, the challenge remains converting the expanding taxpayer base into active, compliant return filers who recognize the importance of formal tax compliance beyond mere TDS deductions.
